Good time for bargain hunting, but buy for long term, say analysts

Investors who picked companies with strong business franchises in the year 2008 or 2012 have seen a multi-fold jump in their portfolio values

A major crash in the broader market offers once-in-a-decade opportunity to accumulate great stocks at historically low valuations. It allows investors to create market beating returns on their portfolio once normalcy returns and economic growth and corporate earnings are back on long-term growth trajectory.

This is what happened in previous market crashes of 2008 and 2012. Investors who picked-up companies with strong business franchises in 2008 or 2012 have seen their equity portfolio grow many times over despite the post-recovery market volatility.

For example, the BSE Sensex jumped two and half times over the next 18-months from the bottom in February 2009. This translated into annualised returns of nearly 74 per cent.

Similarly, after the first half of calendar year 2012, which saw a major sell off, the index nearly doubled over the next three-years translating into annualised returns of around 20 per cent for investors who bought at the market lows.

Many leading stocks in sectors such as retail lending, FMCG, consumer durables, automobiles and cement are still up nearly 10 times from their 2012 lows despite recent correction.

Not surprisingly analysts are advising investors to treat current correction as a long-term buying opportunity. “We are asking clients to accumulate good names in consumer products, cement and retail lending,” says Dhananjay Sinha, head research Systematix Group.

According to him, record low oil prices will lead to margin expansion in paints, cement and consumer products aiding corporate earnings.

Others see big jump in quality mid-caps once the dust settles in. “Many quality mid-caps are now quoting at single digit P/E ratio providing great value for long-term investors,” says G Chokkalingam, founder & MD Equinomics Research & Advisory Services.

Analysts also see gains from a plunge in yields on government bonds across the globe, including India, due to flight to safety by investors and recent cut in benchmark interest rates by the US Federal Reserve.

This has created a situation where dividend yield on many stocks are lower than the bond yield, making stocks highly attractive.

The earnings yield for Sensex companies now exceeds US 10-year treasury yield by 390 basis points. Such a large spread was last seen during the 2012 market correction. One basis point is one-hundredth of a per cent.

We have curated a list stocks across sectors that could bounce back strongly once the macroeconomic dust settles-in. These stocks offer a good combination of strong balance sheet, leading position in their market, relatively low valuation on historical basis and strong track record of consistent performance.

Stock write-ups by Ram Prasad Sahu, Ujjval Jauhari and Shreepad S Aute